IMF Annual Meetings: A public sector shutdown meets its master

When the
delegations arrive in Washington next week for the Annual Meetings of the
International Monetary Fund (IMF) and the World Bank, they will face a
situation that the citizens of IMF programme countries know all too well: The
public sector has shut down due to a debt crisis and the policy response that
followed. Let’s see if this helps to make the governors of the international
financial architecture’s most powerful institution learn some lessons and make
the right decisions.

Welcome to the IMF’s first Annual Austerity
Meeting

The good
news for the IMF: Absenteeism from the Annual Meetings will be much lower than
usual as sight-seeing options in Washington are currently limited. The Smithsonian
Museum complex may be the world’s largest and is indeed worth a visit, but it’s
currently closed because the staff had to be laid off – a fate that is shared
by 800,000 workers who were employed by the US government in more liquid times.
So there is a chance that someone will actually listen to Madame Lagarde’s keynote
address and IMF staff presenting their new reports.

The
shutdown also brings the opportunity to update some recent IMF research, for
example, on fiscal
multipliers. CNN estimates that the shutdown could cost
the US economy about USD 1 billion every week. Other
estimates are that a 2-week shutdown would reduce GDP growth by 0.3 percentage points.
While the IMF’s track
record is to misjudge the impact of public spending cuts on economic growth by
a wide margin, the US’s current experience offers a valuable opportunity to
test improved methodologies that were developed after Greece’s economy was ‘accidentally’
destroyed following erroneous
IMF advice. Now, is CNN’s estimate right or wrong? We are all waiting for
the IMF’s response.

Home-made public sector shutdowns

Of course, the
current situation in the US is not funny and it would be inappropriate to make
jokes at the US’s expense. We hope that federal employees will get paid soon,
and that American citizens can fully enjoy their public services again – which
are not very generous anyway, when compared to most European states (pre-Troika
programmes). But what distinguishes the situation in the US from those in other
countries is that the trouble is home-made and can be home-solved too. In many
other countries, debt crises are jointly made by the IMF and cannot be solved
without assistance from the IMF.

The US
government is in a more comfortable situation than developing countries, or even
than Euro zone countries that gave up their sovereign monetary policy when they
joined the European Monetary Union. US government debt is basically all US dollar
debt. US government expenses are basically all US dollar expenses and - still
being the master of its own money, the Fed is under tighter democratic control
than central banks elsewhere - the US government can essentially print as many
US dollars as they like to fund public expenses or pay off debts. It is simply
a legal debt ceiling that is causing the current troubles, and laws can be
changed – if you have the majority to do so, which the Obama administration, to
its misfortune, does not have in the US Congress.

American
public debt soared due to tax cuts that led to chronic fiscal deficits and
consequently high borrowing needs to fill the gaps. This coupled with the ‘debt
shock’ that were the bank bail-outs during the financial crisis – which were,
in turn, a consequence of financial sector liberalisation and the reckless
lending and borrowing it facilitated – led to the enormous sovereign debt piles
we are seeing now.

And IMF-made public sector shutdowns

Developing
countries experienced tax and import tariff cuts, capital account and financial
sector liberalisation, and publicly-funded bank bail-outs too. But here it was
‘soft’ advice or hard loan conditionality
by the IMF and its sister organisation, the World Bank, that led to such
false policies that increased vulnerability and often triggered sovereign debt
crises. Debt limits that
restrict public borrowing and can constrain public spending exist for
developing countries too. But here it is not a democratically elected
parliament that sets and can change them, it is the IMF.

Debt crises
are obviously not uncommon for developing countries (nor are they for Europe
these days), but here printing money is not an option because their debt is
mostly foreign currency debt and, if it becomes unsustainable, they cannot
print their way out of trouble. They would need emergency loans in situations
of illiquidity or sovereign debt restructuring in situations of clear
insolvency. In both cases, the IMF plays a central role.

Need help from the IMF? You’ll get too little –
too late

The US’s
public sector shutdown might already be over when the Annual Meetings actually
start, depending on how long the wranglers in the US Congress need to reach
consensus and make the fresh dollars flow. In developing countries, the impact
of debt crises is felt for much, much longer.

All the evidence
is that IMF
and IMF-facilitated debt relief often comes too little – too late, so that
public services are already ruined when the relief finally comes. When it
comes, it comes with conditions to cut public services even further, so that
the crises hit the poorest people hardest because they don’t have the cash to
satisfy their needs on private markets.

Delegates from
Eurodad are going to ask at the Annual Meetings why the IMF
suffers from this too little – too late problem. We had hoped that an IMF
expert would contribute some explanation on our panel, but for some reason our
request remained unanswered. Anyway, our independent experts definitely have
some deep insights into the flaws in the system. And, let’s see, perhaps the US
shutdown might even incentivise the IMF governors to an overdue reflection on
the fundamental change that this system urgently needs.